A ‘violent’ and ‘crushing’ move higher is taking shape this month, strategist says

Nomura strategist Charlie McElligott on Monday called for a “violent short squeeze” in the market,” and nothing about that session’s whipsaw turnaround and Tuesday’s opening push higher has him changing his mind.

In fact, he’s doubling down on his bull call.

We have “kindling for a massive short-squeeze over the next month,” McElligott wrote in a follow-up note highlighted on the Heisenberg Report blog.

No squeeze as of Tuesday afternoon. The Dow Jones Industrial Average
DJIA, +1.38%
dipped into the red after getting an initial lift from word that the U.S. and China made some headway in trade talks. Regardless, McElligott says “the risk of forcing an equities cover” could deliver a fierce Santa rally.

“The largest near-term catalyst for a crushing equities move higher remains fund positioning, which is creating an enhanced-risk of positioning squeeze, as it builds fodder for a violent bear-market rally which nobody owns”, McElligott wrote.

In other words, funds are heading toward the end of the year heavily on the short side, and, considering the “horrible 2018 performance backdrop,” they don’t have any appetite for further drawdowns.

He pointed to CFTC data that showed leveraged funds added to their S&P shorts by $5.8 billion to a net short position to -$15.1 billion.

McElligot says that, after the recent spike higher for the market, “buy triggers” are now within reach and could lead to forced deleveraging.

Other tailwinds for the S&P 500
SPX, +1.32%
he mentioned include overwrought “end-of-cycle” fears, a “dovish pivot” from the Fed, and a bullish tipping over of the crowded “long dollar
DXY, -0.04%
” trade.

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